New FHA rules may further cut access to credit, analyst says

New mortgage rules announced Wednesday that aim to strengthen the Federal Housing Administration’s finances could end up further constraining borrowers’ access to credit, according to an analyst report.

The FHA, a federal mortgage insurer, said new rules will raise annual insurance premiums for most new mortgages by one-tenth of a percentage point. Also, most borrowers will be required to pay mortgage-insurance premiums throughout the life of a loan, rather than stopping payments when the outstanding principal balance reaches 78% of the original principal balance.

“This will permit FHA to retain significant revenue that is currently being forfeited prematurely,” according to FHA.

FHA finances could use some support. A fiscal 2012 report said losses from loans FHA insured between fiscal 2007 and 2009 “continue to place a significant strain” on funds used to insure mortgages, and that the capital reserve ratio went negative for the fund behind FHA’s single family mortgage insurance programs.

FHA is an important player in the housing market. FHA’s share of single-family-home-purchase loans is about 26%, down from a recent peak of almost 33% in 2009, but far higher than a trough of about 5% during the bubble, according to a recent quarterly report from the U.S. Department of Housing and Urban Development.

“In addition,” she said, “these changes will encourage the return of private capital to the housing market, and make sure FHA remains a vital source of affordable and sustainable mortgage financing for future generations of American homebuyers.”

However, the new rules support concerns that it’s becoming harder and pricier for home buyers to obtain a mortgage, wrote Jaret Seiberg, a policy analyst with financial services firm Guggenheim Securities, in a research note.

“We believe this is especially negative for first-time homebuyers, as they are the ones most likely to turn to FHA for credit. As we have long argued, you cannot have a healthy housing market without a constant influx of first-time buyers,” Seiberg wrote.

Economists, including Federal Reserve Chairman Ben Bernanke, have been concerned for some time that overly strict lending standards are preventing worthy borrowers from participating in a strengthening housing market. To encourage lending, federal regulators recently announced other mortgage rules on transparency and underwriting, hoping to increase confidence among borrowers and originators. However, some observers say rules could have the perverse effect of making it even tougher to get credit as lenders refuse to offer mortgages that fall outside of a very specific set of criteria.

Also Wednesday, FHA said it will propose raising required down payments to 5% from 3.5% for mortgages with original principal balances above $625,500.

“This change, coupled with the statutory maximum premiums charged for these loans, will help protect FHA and further facilitate its efforts to encourage higher levels of private market participation in the housing finance market,” according to FHA.